Virgin America Applies Brakes to Fleet Growth

More evidence of capacity constraint among U.S. airlines appeared in a recent quarterly earnings report from one of the fastest-growing carriers in the country. Virgin America, which has seen annual available seat mile (ASM) growth average 28 percent for the past three years, has reconsidered its fleet expansion strategy and said it would move to cut the number of airplanes it plans to add over the rest of the decade. Under a revised agreement reached with Airbus, Virgin America’s order for current-generation A320s will shrink from 30 airplanes to 10, all scheduled for delivery in 2015 and 2016. Virgin America has also opted to delay delivery of 30 A320neos from the originally scheduled 2016 through 2019 to a new time span ranging from 2020 through 2022.

Average ASM growth will slow to “mid-single-digits” over the next “several” years, said the airline. From the third quarter of 2010 through the third quarter of 2012, it increased ASMs by 73 percent, while the rest of the industry averaged 0.4 percent. The company has taken delivery of 24 aircraft since the first quarter of 2010, expanding its fleet size to 52 Airbus A320-family aircraft over that period.

“Virgin America’s rate of growth was necessary to establish the airline’s core network and to achieve economies of scale,” it reported. “However, as the airline absorbed the tail-end of this growth cycle, its entry into new markets created margin pressure which offset gains in more mature markets.” Having come to close to the end of what it called “this phase of accelerated growth,” the U.S. carrier has now said that it will take delivery of just one additional aircraft in 2013.

“Our major challenge has been managing significant growth into new markets during both a recession and an environment of historic oil price highs,” said Virgin America CEO David Cush. “All airlines have faced these same industry challenges, but none have done so as a brand-new carrier fueling 73-percent capacity growth in the past 24 months.”

While Virgin America scales down its narrowbody ambitions, in the UK Virgin Atlantic last week announced plans to increase its short-haul flying out of London Heathrow Airport after gaining 12 pairs of slots forcibly abandoned by International Airlines Group (IAG), parent of British Airways, as a condition of its BMI acquisition.

Meanwhile, in other airline developments last week, SAS averted the threat of imminent bankruptcy by gaining cost-cutting and work-rule concessions from its flight crew unions. Pending government approvals, SAS as a result gains access to a $520 million bank credit facility needed to maintain its operations.